Africa Finance Forum Blog

As Nigeria rolls out one of the developing world's most ambitious policy platforms to boost digital payments and drive greater financial inclusion, it's important to take stock of the country's progress to date, so that policy-makers around the world can learn from Nigeria's experiences.

To this end, the Better Than Cash Alliance has just released two pivotal studies documenting Nigeria's digital journey, including the prospects for further progress in key areas, and four in-depth case studies which, whilst not a representative sample of all large businesses, nonetheless provide several important lessons.

In aggregate, the studies paint a mixed but broadly encouraging picture of Nigeria's success. The transition from cash to digital payments is progressing at very different speeds in different sectors of the economy and by different payment type.

The most promising findings relate to mass payments from a single payer to many payees ('bulk payments'). On this front the Nigerian Government is leading by example, making all of its pension payments, supplier payments and payments to state and municipal governments electronically, along with 61% of its salary and social subsidy payments. Importantly, the Government's leadership has created momentum that is combining with the Central Bank of Nigeria far-reaching Cash-less Nigeria program and driving significant progress towards digital payments among large businesses.

Cash-less Nigeria entails a wide range of policy initiatives ranging from public information campaigns, point-of-sale guidelines and restrictions on cash-in-transit services, and fees to disincentivize cash withdrawals. It is supported by the National Electronic Identity (e-ID) Card, a national ID that citizens may also choose to activate as a MasterCard-branded payment card. The policy was first implemented in 6 states (Lagos, Rivers, Anambra, Abia, Kano, and Ogun State) and the Federal Capital Territory (FCT), and it was rolled out nationwide in 2014.

As an indication of progress in Nigeria's corporate sector, as of 2013 large businesses now pay 61% of salaries electronically (compared to 31% in medium businesses, and 15% in small businesses). Indeed, one of the key insights to emerge from BTCA's studies is that digital payments now appear to have passed a tipping point in Nigeria's corporate sector, with the result that for large businesses it is not a question of whether to make the transition to digital payments, but rather one of when and how.

However, for other payment types the progress has been more modest. Although they exist, when it comes to payments by many payers to one payee (e.g. consumers paying a utility company or the national tax authority) digital payment options have not been widely utilized. Factors contributing to this low take-up include an absence of aggressive marketing of digital payment options by utility and other consumer-facing companies, the ubiquity of cash payments, and the large portion of the population that does not have a bank account.

Payments by individuals to one commercial payee (ie. a merchant) make up the overwhelming volume of payments in Nigeria, as it does in many markets. In this category, only 1% of payments by volume are currently being made digitally.

Several key barriers to the faster digitization of payments emerged from the Better Than Cash Alliance's studies. Chief among them is the widespread concern among individuals and small businesses about the scrutiny and consequent tax obligations they will face if they adopt digital payment tools. At the same time, there also exists a broad lack of understanding among individuals and small businesses of the benefits of going digital. There is a clear need for more public education campaigns to fill this knowledge gap. That being said, there is also evidence from a 2014 survey of 600 small businesses that some merchants are starting to recognize some of the key benefits, such as better record-keeping tools.

Also central to the findings is recognition of the need for better infrastructure and stronger incentives to drive change forward. While digital payment infrastructure is advancing rapidly in Lagos, and to a lesser extent in other major cities, it is, unsurprisingly, far less developed in rural and remote areas. Action is needed to overcome these digital gaps.

It is also noteworthy, that debit cards have been widely issued to Nigeria's urban and banked population, but consumers overwhelmingly only use them for cash withdrawals (which are generally free), rather than to make payments at the point-of-sale (POS). This low demand among consumers for digital point-of-sale facilities in turn means merchants have little incentive to invest in digital POS facilities, such that "the use of cards at merchants appears to be at a standstill", according to our analysis.

These are the types of challenges that Nigerian policy-makers will need to address with a new round of targeted initiatives if Nigeria is to build on its successes and aggressively drive greater financial inclusion through digital payments. Happily, the ambition and leadership the Government and Central Bank of Nigeria have already demonstrated augurs well for the future.

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Camilo Tellez-Merchan is the Knowledge and Research Manager for the Better than Cash Alliance. Prior to joining BTCA, he worked at CGAP in Washington and the GSM Association in London where he supported providers in the area of digital financial services. He has also worked at the UN Economic Commission for Asia and the Pacific in Bangkok, and at the Microsoft Labs in Bangalore where he conducted ICT4D research in the technology for emerging markets team.

* An edited version of this piece originally appeared in the Autumn edition of Housing Finance International, the journal of the International Union for Housing Finance.

The African Union for Housing Finance's (AUHF) conference, which will take place on October 26 -28 in Durban, South Africa, promises to focus on making housing finance markets work in Africa. The line-up is impressive, with speakers from across the continent and the globe, focusing on financing the housing value chain, growing the capacity of housing microfinance, and responding to demand. The keynote address will be offered by the African Development Bank, and will set out the findings from their recent study into housing market dynamics across the continent. Following this, the African Union's Housing and Urban Development (HUD) Coordinating Committee will make a presentation on the Draft Africa Common Position - Africa's input into the Habitat III process which will culminate in Ecuador in April, next year. The AUHF conference will produce a "Durban Declaration", a statement on housing finance in Africa and the key issues that practitioners in the private sector will commit themselves to in the coming years.

The African Development Bank's work into housing markets is important, because it signals the institution's interest in focusing on housing and working with both governments and the private sector to develop and implement solutions to address the various problems undermining functioning housing markets in the continent. It comes at a good time, offering recommendations into the Habitat III process, which hopefully will pull together the public and private sectors into a coordinated effort. Of course, a key set of constraints sits at the macro-economic level: average mortgage interest rates across the continent range from 9.25% in South Africa through to 42% in Madagascar. This is what makes the participation of the AU at the AUHF meeting so significant, as that body offers the opportunity to engage with governments through the AU structures.

A further component of the AUHF conference is the Housing Finance Marketplace, a combined effort by the AUHF and the Making Finance Work for Africa Partnership (MFW4A) that aims to increase access to assistance for housing projects. As many stakeholders are unaware of how funding and technical assistance from investors can be tapped for projects, the Marketplace creates a platform that not only fills this information gap between stakeholders and investors, but also increases the ease of accessing assistance for specific projects. The Marketplace will launch at the AUHF, and will allow for one-on-one meetings between investors, DFIs and housing practitioners - projects, programmes and initiatives - towards sealing new deals to promote investment in affordable housing across the continent.

In its recent directory of investors, the Global Impact Investment Network identified a number of investors already active in housing across Africa, including Rockefeller Foundation, Echoing Green, Credit Suisse, LoK Capital, Ludin Foundation, Oikocredit, CDC Group, Blue Haven, MicroVest, Acumen, TH Investments LLC, AdobeCapital, AlphaMundi Group, Cordaid Investments. Just within East Africa, twenty-three impact investors were identified as having an interest in housing. Among them, just fewer than ten deals involving collectively about US$150 million worth of investment in housing were identified. Interest notwithstanding, housing was low on the list of priorities, trailing investments in other sectors, namely financial services and agriculture, and the number of deals realized was fewer than the number of interested investors. Why is this? Clearly there are factors in the housing sector in Africa that are stopping the market from working as effectively as it could. This is one of the issues that the AUHF conference will address.

Within this environment, one area that has been receiving increasing attention by investors, DFIs, financiers, as well as local banks and developers, is rental housing. In June, Shelter Afrique hosted a symposium in Ghana, on developing affordable housing for rent. This followed a conference on rental housing held by Shelter Afrique in December 2014, and supported by the Agence française de développement (AFD). Over the course of these events, key motivations for investing in the sector were highlighted: (i) given urbanization rates and demographics, demand for rental housing was clearly evident and growing; (ii) with a regular cash flow and increasing rentals, the sector offered strong synergies with pension fund liabilities, and opportunities for diversification and hedging; and (iii) the growing track record of the sector showed impressive yields. As with the broader housing sector, key factors undermining investment had to do with institutional and regulatory capacity[1].

Clearly, investment in these broader, macro-level issues is required if investor interest is to be translated into effective deals. A number of recommendations towards supporting the rental sector were offered. As a first priority, it was noted that governments at all spheres, from the national to the local level, should identify and support, in both policy and administrative terms, the opportunities to be found in the "build-to-let" market. This could be achieved, in part, through the release of public sector land for rental housing. A further recommendation emphasized the importance of scale interventions and the need for new business models (possibly the establishment of public sector supported funds to gear private sector investment) to entice investor participation in the market. The establishment of a body of best practice was also necessary, both to demonstrate successes and create a framework for on-going learning. Shelter Afrique has promised in this regard to publish a Rental Housing Development Manual, setting out rental housing transaction structures, financial modelling options, management experience and best practice, design standards, model leases, and so on. Pilot initiatives to demonstrate viability would also be identified and pursued.

Certainly, the rental-housing sector offers opportunities for a wider array of practitioners to participate in Africa's housing challenge. Through this, investors may also become more familiar with the dynamics of residential investment, while local authorities become familiar with addressing the implications of scale. The emergence of REIT-friendly legislation in many countries was offering opportunities to build this broader capacity. All of these issues will be considered at the upcoming AUHF conference. The "Durban Declaration", arising from the conference, will offer opportunities for all role players to play their part and participate in the exciting growth of African cities.

Kecia Rust is the Executive Director and founder of the Centre for Affordable Housing Finance in Africa (CAHF). She is a housing policy specialist and has provided strategic support to governments in South Africa in the development of national, provincial and local housing policy for the past 20 years. She was the Housing Finance Coordinator at the FinMark Trust from 2003-2014, from where CAHF was established. Under her direction, CAHF was appointed as the Secretariat to the African Union for Housing Finance, an association of about 40 mortgage banks, building societies, housing corporations and other organisations involved in the mobilisation of funds for shelter and housing across Africa. CAHF's work is represented on its website: www.housingfinanceafrica.org

A growing number of policymakers see financial inclusion-greater access to financial services throughout a country's population-as a way to promote and make economic development work for society. More than 60 countries have adopted national financial inclusion targets and strategies. Opening bank accounts for all in India and encouraging mobile payments platforms in Peru are just two examples. Evidence for individuals and firms suggests that greater access to financial services indeed makes a difference in investment, food security, health outcomes, and other aspects of daily life. Our study looks at the benefits to the economy as a whole.

We find there are economic benefits to greater financial inclusion, up to a point, and countries need high quality banking supervision when they broaden access to credit.

Tangible benefits from inclusion

Evidence on the macroeconomic effects of financial inclusion is scarce. Do living standards significantly improve, or is financial inclusion only a drop in the bucket? What are the growth and stability trade-offs of financial inclusion? Are there risks that financial inclusion leads to "too much finance"? India's microcredit crisis and the U.S. subprime mortgage crisis are examples of instability fueled by easier credit access.

Our study examines the macroeconomic dimension of financial inclusion using comprehensive global data from the Financial Access Survey, Global Findex, and other new datasets. The results suggest that there are tangible economic benefits, such as higher GDP growth from expanding financial inclusion.

Looking at the data, what does financial inclusions's track record tell us?

Mind the gap

The world has seen improvements in financial inclusion, but considerable gaps remain. The percentage of adults with bank accounts increased from 50 to about 60 percent worldwide between 2011 and 2014. However, some two billion adults remain "unbanked". Furthermore, out of the banked population, almost 40 percent do not effectively use their accounts, either to make deposits or withdraw money.

These trends mask persistently large differences across countries, regions, individuals, and firms. While inclusion is high in Organization for Economic Cooperation and Development countries, with a banked population of over 90 percent, it is markedly lower in developing countries, at 54 percent, and particularly so in South Asia and the Middle East.

Worldwide, men are five percent more likely to own accounts than women, and nine percent more likely in developing countries. Survey data also show that small firms are considerably more likely to feel credit-constrained than their large counterparts, by some ten percentage points.

We provide new data underscoring that the gender gaps are even larger in bank leadership and supervision than they are on the user side of financial services. Women hold less than 20 percent of bank board seats and represent less than two percent of bank CEOs. The share of women in banking supervisory boards is also low, at about 17 percent on average.

Impacts on growth, stability, and inequality

Our analysis finds that the various types of access-accounts, credit, infrastructure, women users, low-income-improve economic growth, but up to a point. These growth benefits are in addition to those derived from increasing financial depth. Earlier studies have found-with some qualifications-that countries have achieved higher growth rates with deeper financial systems. Our analysis shows that financial inclusion provides an additional growth boost once depth is accounted for. However, the benefits fall as both financial access and depth become large.

Our study also shows that the effects on financial stability of broadening access to credit depend on the quality of a country's financial supervision. We assess the quality by taking country scores on the Basel Core Principles of Banking Supervision, assessed in the IMF-World Bank Financial Sector Assessment Programs. When supervision is of high quality, broadening credit access leads to an increase in financial stability, as the banking sector builds up healthy capital and profit buffers. When supervision is of low quality, these buffers decline as credit access broadens (see figure).These results hold for economic stability as well. This presents a dual challenge for many countries, since we also find that supervisory quality tends to be deficient precisely in countries where financial inclusion is most lacking.

In contrast to credit access, financial stability does not significantly deteriorate with other forms of financial inclusion, such as access to bank accounts, branches, and ATMs. Our results suggest that countries can expand these services without impeding financial stability.

We also find that gaps in financial inclusion are associated with economic inequality, but the association appears relatively weak.

In a nutshell, financial inclusion can help achieve several macroeconomic goals. However, there are limits to what it can do, and its benefits diminish as both financial access and depth become large. In particular, broadening access to credit can compromise stability if supervision is weak.

About the Study Authors:

Rana Sahay is Deputy Director of the IMF's Monetary and Capital Markets Department;

Martin Čihák is an Advisor in the IMF's Monetary and Capital Markets Department;

Financial access in Africa is heavily constrained. The percentage of adults with a bank account in sub-Saharan Africa was only 34% in 2014 (compared with 51.4% in Latin America, 93.6% in the US and 69% in East Asia & Pacific). This limited access has important implications for economic development; lowering savings, impeding efficient channeling of funds and generating and sustaining poverty traps.

Many projects have worked on addressing the different causes of these limitations that includes underdeveloped financial infrastructure, financial illiteracy and poor economic performance. However, other factors have been overlooked, including the fact that cultural/religious causes prevent many Muslims from dealing with the traditional banking services. Muslims constitute more than half of Africans (around 53%). Many Muslims are traditionally opposed to interest-bearing accounts (because of the Islamic ban of riba), which distance them even further from formal financial services.

Several financial products are permissible for Muslims, although they differ in their degree of acceptance. Some of the most acceptable financial products are based on profit-and-loss sharing (PLS), although they are the least used in Islamic banking because they are perceived to be extremely risky.

In a recent paper, we examine this perception and experimentally demonstrate that PLS Islamic finance products are no more risky than other financial products like interest-based loans.

We compared two PLS microfinance contracts that are Islamic-compliant (profit sharing and joint venture) with interest loans. Each borrower made decisions to invest in risky projects using the three types of contracts. The outcome of the project is known to the borrower, but not to the lender. We then compared the compliance rates of the participants in each of the three contracts. If indeed, PLS contracts are riskier, we would have expected to find higher default rates in those contracts relative to interest-bearing contracts.

In contrast, we found that Islamic-compliant loans induce at least as much compliance as interest loans, and sometimes significantly more. Lenders' return on investment was higher in profit and loss sharing agreements than either profit sharing or interest-based loans (which were roughly equivalent). We also found that women comply more than men, consistent with common wisdom and practice in microfinance. Further, religiosity increases compliance rates. It is worth noting these patterns hold regardless of any particular religious belief.

Based on this research, we suggest that PLS microfinance products should be seriously considered. These products would benefit and attract African Muslims, and would provide the poor with a financial instrument that they can utilize without increasing the risks to the lender. Profit sharing and joint venture contracts would be useful tools for both Muslims and non-Muslims in Africa. For Muslims, they will increase banking account access and for everyone, our results suggest that they will yield greater compliance rates in microfinance than the contracts currently in use.

In summary, we hope that this research will encourage microfinance scholars and practitioners to consider new and innovative contractual designs, which will help in increasing access to credit for the limited-income consumer.

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